Fixing Capitalism

Author:Prakash Loungani
Position:PRAKASH LOUNGANI is assistant director of the IMF's Independent Evaluation Office.

The Third Pillar: How Markets and the State Leave the Community Behind,Raghuram Rajan

September 2019 | FINANCE & DEVELOPMENT 55
Fixing Capitalism
have long competed to
control what Lenin cal led the commanding heights
of the economy. After the Berlin Wall fell, markets
seemed to reign supreme. Even many on the left,
traditional supporters of a strong state, became
champions of free markets. e bri lliant economist
Larry Sum mers professed “grudging ad miration”
for Milton Friedman and, while at the US Treasury
in the 1990s, pushed for nancial globa lization,
the free ow of capital across nationa l borders.
Raghu Rajan ne ver succumbed to the euphoria.
While a rm belie ver in free markets and t heir
benets, he has been vocal a bout their costs. In
Saving Capitalism from the Capitalists he wrote
that the victims of c ompetition should get help to
ease their pain a nd secure their futu re: “Markets
need a heart for their own good.” In 2005, in a
now-famous speech, he warned that the excesses
of nancial global ization raised the odds of a
“catastrophic meltdown,” earning a rebuke from
Summers that Rajan was “slightly Luddite” and
“largely misguided.”
e global nancial cr isis and recent discontent
with globalizat ion have proved Rajan prescient. His
latest book attempts to go beyond warnin g of the
dangers of unfettered capitalism to what can be
done to x it. Rajan suggests restoring the third
pillar of society, the community, which he denes
as a social group residing i n a specic area that
shares government and often a common heritage.
Markets and the state remain indispensable, but
“when the three pillars of so ciety are appropriately
balanced ” … “society has the best ch ance for
providing for its people,” particularly those who
lose out from the eects of trade and technology.
Rajan points up the dama ge from international
trade. US job loss from increased foreign compet i-
tion, for instance, has contributed to lowering the
life expectanc y of middle-aged non-Hispanic white
males. “It is as if ten Vietnam w ars were simultane-
ously taking plac e, not in some faraway land, but
in homes in small-town and rur al America,” Rajan
writes. Yet these communities’ fate was la rgely
neglected by the mains tream establishment partie s,
who Rajan laments “do not even adm it to the need
for change” and tend to cast igate losers from the
eects of trade and tech nology as belonging to a
basket of deplorables.
Rajan of course knows t hat communities too
can pose dang ers. e book contains a fascinating
account of how markets and the state overca me
the shortcomings of feudal c ommunities, which
provided stability but did little to spare most f rom
abject poverty. Modern communities also erect
walls, and overemphasis on tradition and fear of
strangers and new idea s can leave people “trapped
by the past.”
Still, Rajan ar gues, markets and the state have
usurped communities’ power, and the bala nce
needs to be reset. Power must devolve from global
and national levels to the com munity. Rajan notes
that as machines and robots begin to produce
more of our goods and services, human work
“will center once again a round inter-personal
relationsh ips.” Communities could well be t he
workplace of tomorrow.
PRAKASH LOUNGANI is assistant director of the IMF’s
Independent Evaluation Office.
Raghuram Rajan
The Third Pillar:
How Markets and
the State Leave the
Community Behind
Penguin Press
New York, 2019, 464 pp., $30.00
Power must devolve from global
and national levels to
the community.

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